"Under the old system, you had to make huge, irrevocable decisions
-- now all you have to do is take out the minimum distribution,"
says Natalie Choate, estate planner with Bingham McCutchen LLP in
Boston and author of "Life and Death Planning for Retirement
Benefits." And since the account custodian files reports to
the IRS each year, "you no longer have to hire a special expert
for that process."
Still, even though the rules are easier to understand, this is
no time to go it alone. "Now I hope the focus will shift to
what is the best way to invest to make the account last and who
should be the beneficiary," says Choate, who recommends meeting
with a financial expert to create an estate plan.
Sit down with a financial planner or estate
planner and look at how much money you have in your
account, how long you and your spouse expect to live,
special needs your family might have and, based on that,
how much money you can comfortably afford to take out
If you have an IRA, no matter how old you are, you need
to name a beneficiary. The beneficiary is the person
who will inherit your IRA when you die. While accountholders
can change beneficiaries whenever they want, most experts
agree that it usually makes the most sense to name a
spouse as beneficiary.
"If you're married and your spouse relies on
your IRA income, that's the person you want to name -- and most
people go this route, says Twila Slesnick, a Dublin, Calif., tax
accountant and co-author of "IRAs, 401(k)s & Other Retirement
Plans: Taking Your Money Out."
If the spouse happens to be more than 10 years younger,
the IRS will allow you to use a joint life-expectancy
table. End result? Since one of you is expected to live
at least 10 years longer -- smaller required withdrawals.
If you die after you start taking your
distributions, your beneficiary will receive the disbursements
over his or her expected lifespan according to the IRS
table. If you have several beneficiaries, the IRS will
use the age of the oldest one. If you die before you
start taking distributions, and have named your spouse
as your beneficiary, the spouse can roll your account
into his or her own IRA, empty the account within five
years, or take disbursements over his or her entire
lifetime. Most spouses choose to roll the money into
their own IRA. If your beneficiary is not a spouse,
that person has two choices: Take the money over five
years or over his or her lifetime.
If you die without a beneficiary before beginning regular distributions,
the account will pass to your estate -- and must be emptied within
five years, says Picker. If you die without a beneficiary after
you begin taking distributions, then the account will be paid out
through your estate over what would have been your lifespan according
to the IRS table.
Some experts believe that IRS regulations now give
executors some latitude in passing IRA accounts on to
the heirs of an estate, even if the accountholder died
without naming a beneficiary for the IRA itself. Others
The best advice? Make things easier for your heirs and name a beneficiary.
And if your IRA is the only money in your estate, leave enough in
life insurance to cover estate taxes, says Picker. That way, your
heirs don't have to dip into the IRA to pay estate taxes then turn
around and burn up additional IRA money to cover taxes on what they
had to withdraw.
Last, but not least, don't forget to put a little
of your disbursement income away for a rainy day. Just because you've
tapped your IRA doesn't mean the days of squirreling away money
are over, says Ed Slott, a New York-based CPA and author of "Ed
Slott's IRA Advisor," a monthly newsletter. "Even though
you are retired," says Slott, "keep saving."
Updated: Jan. 23, 2006